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IR35 - What Does It Mean?

IR35 is one of the most important considerations for any contractor. The legislation was introduced with the intention of properly taxing “disguised” employees and has led to the need for all contractors to consider their status when entering into a relationship to provide services.

Operating outside IR35 allows far greater potential for tax planning although being inside the rules does not always mean that a Limited Company is not a good idea. Being inside IR35 you still have the opportunity to be registered for the Flate Rate VAT schemeand you can claim up to 5% of your turnover as business expenses through the business. The remaining 95% will be deemed to be paid to you as salary.

There is no substitution for a professional review of your contract and working arrangements if you are unsure of your status and are seeking some assurances. We work closely with a leading firm of specialists who undertake these reviews for our clients. Their experience is second to none in terms of arguing their case with HMRC and being able to liaise with Agency Legal Departments to ensure contracts are compliant. Their staff sit on Treasury Committees so they have in depth knowledge of the latest IR35 developments and HMRC's approach to things.

If you would like a review please contact us on 0845 055 7055 so that we can refer you.

The following basic questions should help you decide whether your contract falls inside or outside IR35.

Has HMRC judged that a previous contractor performing the same work has fallen inside IR35?

Whilst this may not be directly related to your contract it is a vital starting point.

Is there a mutuality of obligation?

Is the client obliged to offer you work, as an employer would an employee? Are you obliged to take on the work after the expiration of your contract?

Will the client provide equipment?

From an IR35 viewpoint it is better that you provide your own equipment although sometimes the commercial reality is that for security reasons you have to access the clients systems through their hardware.

Does the contract stipulate a set monthly fee?

The contract should stipulate a day rate to be IR35 friendly, rather than a set monthly fee rather like a salary.

Does the contract stipulate that you will be paid through a payroll system?

To be outside IR35 you should be raising invoices based perhaps on time sheets and not being paid through payroll.

Will the client deduct your tax payments?

Payment of all taxes should be the responsibility of your company and you as a director.

Is it specifically you who must complete the work?

Your contract should allow for you to substitute an equally qualified person to perform the services in the event that you cannot attend.

Does the contract state specific hours that you will work?

You should have control over the hours you work, when and where you work.

Are you entitled to employee benefits?

This does not need to be as significant as a pension scheme but may include the use of a company canteen or the inclusion on an internal phone list. If you have answered “yes” to one or more of these questions your contract may be subject to IR35. This can be expensive from a tax perspective as you will be deemed to have taken 95% of the company’s turnover as salary and will need to pay the associated tax and NI on this. We can review your contract more fully and provide you with an opinion that will give you some peace of mind. In order for us to express an opinion on your status please send your accountant a copy of your contract, and any other document your agency/client are asking you to sign. In addition you will need to complete a questionnaire providing us with further detail as to the contract and working practices.